Independent Contractors and Employees: What's the difference?

In a report published in 2015, the U.S. Government Accountability Office concluded that over 40% of workers in this country have non-standard employment arrangements, i.e., jobs that fall outside of the traditional relationship between employers and employees. This growing group, defined by the GAO as a “contingent workforce,” is comprised largely of independent contractors, part-time workers and the self-employed.

If you’re among the 13% of all workers in the US who are independent contractors, it’s critical for you to understand the difference between independent contractors and employees. Independent contractors don’t receive health insurance coverage, workforce protection or retirement benefits.

How does the law distinguish between independent contractors and employees? Should you actually be treated as an employee? Are you wrongfully being denied benefits for which only employees are eligible?

There is no single test or factor to determine whether an individual should be considered to be an independent contractor or an employee. Rather, the Internal Revenue Service and the U.S. Department of Labor each have their own set of qualifications to determine your employment status. The courts have ruled that all of the factors below should be considered.

The IRS Test – How much control do you have over your own work?

Generally, you’re considered to be an employee – and not an independent contractor – if the employer has the right to control how you complete your work.

The IRS defines various types of control:

Types of instruction given to the employee

Does the employer dictate your hours?

Does the employer dictate your physical location during these hours?

Does the employer tell you what equipment or tools you must use?

Does the employer dictate how you hire or recruit others to help you?

If the answer is yes to these and similar questions, then that is evidence that you are an employee – and not an independent contractor.

Level of detail in the instructions given

Does the employer provide detailed instructions on how you or your direct reports should execute your tasks?

A greater level of detail is evidence that you are an employee – and not an independent contractor.

Level of detail in a review or evaluation system

Are you subject to a review or evaluation system that drills down into the details of your work? Or is it just your final result that is graded?

If you’re being reviewed on the details, this is evidence that you are an employee – and not an independent contractor.

Amount of training provided

Does the employer provide you with on-the-job training?

Does the employer require you to do your work a certain way?

If your employer is providing training in order to teach you how to a job in a particular way, then this is evidence that you are an employee – and not an independent contractor.

Financial factors

Independent contractors generally are paid on a flat fee basis for the completion of a job, though there are certain industries which do pay contractors on a periodic basis.

If you’re being paid periodically, this may be evidence that you’re an employee – and not an independent contractor.

Are you able to work for more than one employer? Independent contractors are generally able to work for multiple employers.

If your employer prohibits you from seeking other concurrent opportunities, then this is evidence that you’re an employee – and not an independent contractor.

The US Department of Labor Test – The Fair Labor Standards Act

The Fair Labor Standards Act focuses on a broader set of factors that the IRS’ list for determining whether you should be considered as an employee or an independent contractor and is often referred to as the “economic reality” test.

These factors include:

How important is the work you’re doing to the employer?

If you’re doing work that is critical to the employer’s business, this is evidence that you’re an employee – and not an independent contractor.

Are you required to exercise managerial skills as part of your job?

Does your employer require you to hire other workers?

Does your employer require you to supervise other workers?

Does your employer require you to make other managerial decisions?

If your employer requires you to act in a managerial capacity, this is evidence that you’re an employee – and not an independent contractor.

Can it be demonstrated that you are making investments in facilities or equipment separate from any such investments made by your employer?

One of the Department of Labor’s tests is to determine whether you have made an investment in the business such that you’re sharing the risk of any potential loss.

If you haven’t made an investment in the employer’s business that is considered significant relative to the employer’s investment, then this is evidence that you’re an employee – and not an independent contractor.

Independence and initiative

Do you exercise business judgment that is independent from your employer’s business judgment?

Do you show initiative by operating as an independent business separate from your employer?

If you’re generally not exercising independent business judgment, or if you’re not operating as a separate independent business, then this is evidence that you’re an employee – and not an independent contractor.

Defined period of your working relationship

Did your employer hire you for a defined period of time?

If your employer has hired you for an indefinite period, this is evidence that you’re an employee – and not an independent contractor.

Type and amount of control

The factors are largely similar to the IRS’ list of control factors.

In essence, if your employer has a high degree of control over the type of work you do and the conditions under which that work is done, this is evidence that you’re an employee – and not an independent contractor.

Contact a Long Island Employment Lawyer Today

If you have questions about your status as an independent contractor contact an experienced employment lawyer from the Law Offices of Cohen & Jaffe, LLP today for a free consultation at (516) 358-6900.